1.1 What is a masternode?
A masternode is simply a server, or computer, that hosts a cryptocurrency wallet that is fully synced to a blockchain that has extended functionality compared to normal full nodes. Extended functions include, but are not limited to:
- Establishing a decentralized budgeting or treasury system
- Participation in network voting and/or governance
- Creating a network money supply management mechanism
- Providing increased privacy of transactions
- Providing instant transactions
Due to the extended functionality of masternodes, operators of these masternodes are typically awarded a material share of each block reward found on a blockchain. Reward ratios (i.e. reward share between staking nodes and masternodes) and functionality of masternodes can vary from cryptocurrency to cryptocurrency. Although a masternode can be operated by anyone, every masternode generally requires a commitment of collateral, a predetermined allocation of cryptocurrency units. This collateralization serves two primary functions: (i) ensures a masternode operator has "skin-in-the-game" and will not participate in the network maliciously, and (ii) creates an inherent mechanism to control the circulative supply of currency in a system.